Progressive Taxation, A Few Kind Words

Progressive taxation is the concept that the wealthiest among us should pay the most taxes. This makes sense since the rich have the most to gain from a strong national defence to protect their way of life, a strong police force and criminal justice system to protect their wealth and a world-class education system  providing the skilled workers they need to keep their companies growing.

In 2010, some states elected Republican governors and legislators that disagreed with the idea of progressive taxation. These people believed that if their states cut taxes for the rich, that these people would turn around and create more jobs. “Trickle down” for the masses, so to speak. In 2017, Republicans want to apply these tax cuts across the entire U.S. in hopes of creating many more jobs and stimulating the economy.

Republicans like to call states “laboratories for democracy”. Logically, we should look at the data from these laboratories before jettisoning progressive taxation. We should also apply lessons learned by the states.

For this analysis, four states were picked. In addition, United States data is also included and used as a benchmark. California and Kansas are chosen because they took diametrically different directions from 2011 forward in addressing their futures. California implemented the country’s biggest tax increase and Kansas implemented the country’s biggest tax cut. Minnesota and Wisconsin are included because they are adjacent and similar in many ways. However, their elected representatives followed completely different tax policies.

Information on individual taxpayer rates used below are found at http://www.tax-rates.org/. State income tax estimates used below utilize 2016 tax rates. The numbers provide a consistent means of comparison between states.

California

  • In 2012, voted to raise taxes on people making over $1 million annually, bringing the top tax rate to 13.3 percent, the highest in the U.S. This means that all income over $1 million for a single person are  taxed at a13.3 percent rate.
  • An individual making $30,000 annually or a couple making twice that will pay $594 in state income tax.
  • An individual or couple making $1,500,000 annually will pay $175,562 in state income tax
  • California’s sales tax rate is 7.5 percent and can be as high as 9.75 percent

Kansas

  • The most dedicated adherent to the tax cut philosophy is Kansas Governor Sam Brownback. With the aid of his Republican legislature, he passed huge tax cuts that were signed into law in May, 2012. They were implemented in 2013.
  • Brownback promised that state tax revenues would grow and replace the lost revenue from tax cuts. He also predicted a surge in hiring as new businesses moved to Kansas and established businesses flourished and expanded. None of these happened.
  • Because of continued tax revenue shortfalls and Kansas burning through their financial reserves, bond rating agencies continually downgraded Kansas’s credit rating.
  • Brownback blamed the revenue problems on lower agricultural and oil prices. Numerous studies have shown this is not true.
  • Because of tax revenue shortfalls, school funding formulas were changed and some schools simply shut down early when they ran out of money.
  • After finding the state with a $900 million budget shortfall, the Republican led Legislature passed veto proof tax revisions in 2017 rolling back earlier tax cuts.
  • An individual making $30,000 annually will pay $854 in state income tax.
  • An individual making $1,500,000 annually will pay $68,474 in state income tax.
  • Kansas’s sales tax is 6.5 percent.

Minnesota

  • Minnesota Governor Mark Dayton (D), raised the tax rates in 2011 on singles making over $150,000 annually and couples making over $300,000 to  generate $500 million in extra revenue to fund schools and infrastructure.
  • An individual making $30,000 annually will pay $1,065 in state income taxes.
  • An individual making $1,500,000 will pay $142,571 in state income taxes.
  • Since the tax increases were implemented, Minnesota has had continual budget surpluses.
  • Minnesota’s sales tax is 6.875 percent and can be as high as 8.375 percent.

Wisconsin

  • According to an April 2017 Brief published by the Public Interest Institute, “Over the course of six years and three biennial budgets, a wide variety of changes to Wisconsin tax laws have generated a total taxpayer savings of $4.756 billion, the LFB [Legislative Fiscal Bureau] estimates.” http://www.limitedgovernment.org/brief24-12.html
  • Besides the aforementioned tax cuts, according to the Wisconsin Budget Project, “The Manufacturing and Agriculture Credit, which lawmakers passed in 2011, nearly wipes out income taxes for manufacturers and agricultural producers — at a very steep price. The tax credit reduces state income tax revenues by $284 million a year in fiscal year 2017 and in subsequent years.” The Manufacturing and Agriculture Credit (MAC) provides tax credits to companies and individuals that purchase eligible equipment. The average tax credit for individuals with annual incomes over $1 million is $27,632. A very small percentage of these tax credits went to agricultural producers with manufacturers receiving the great majority.
  • Wisconsin Governor Scott Walker (R) proclaimed that between lowering taxes and “getting government out of the way of employers, who will then help Wisconsin create 250,000 jobs by 2015, and as we create those new jobs, we will be able to add 10,000 new businesses.” As of December 2016, the latest period data  is available, Wisconsin has still not added the 250,000 jobs Walker promised.
  • An individual making $30,000 annually will pay $927 in state income taxes.
  • An individual making $1,500,000 will pay $110,266 in state income taxes.
  • Wisconsin’s sales tax rate is 5.5 percent and can be as high as 6.0 percent.
The results

All of the above states elected new governors in 2010 and began implementing new policies in 2011 when they assumed office. Because of this, the following analysis compares performance to 2010, the year before they took office. Three measures are used to analyze what has happened in the above states. Job growth, measured using the Quarterly Census of Employment and Wages compiled by the Bureau of Economic Analysis, is the most accurate measure of full-time jobs added to the economy.

A second measure is the change in wages, again using the very accurate Quarterly Census of Employment and Wages. The third measure is Gross Domestic Product, which analyzes total economic output.

Frugal Ron acknowledges some  shortcomings in this analysis. The period being studied is short. Added to that, the 2016 data is marked “Preliminary”. Rather than trying to measure correlations and determine statistical significance, consider this an observational study and look at trends.

Job Growth

Figure 1

Source: Bureau of Labor Statistics, Quarterly Census of Employment and Wages June/2017.

Many factors impact job growth in a state. Figure 1 tells us in no uncertain terms that lowering taxes DOES NOT positively outweigh those other factors.

California, with its mega tax increases and in spite of previously being a high tax state is pulling away from the rest of the country insofar as adding jobs is concerned. Minnesota, the maroon line,  is almost perfectly aligned with the U.S job growth.

The states that sacrificed their education systems, their roads and infrastructure for the holy grail of having low taxes for the rich have the poorest job gains to show for it. While the differences between Minnesota and Wisconsin are relatively small (compared to Kansas and California), the difference is widening. There is no evidence that the rich, after getting their taxes cut,  turn around and create jobs.

Figure 2

Source: Bureau of Labor Statistics, Quarterly Census of Employment and Wages June/2017

Figure 2 illustrates Kansas’s problem dramatically. While Figure 1 is cumulative , Figure 2  illustrates how the wheels are falling off the bus in Kansas and highlights why the Republican led Legislature had to step in with some fiscal discipline.

People want their children to have a better life than they have. The secret to attaining this goal is education. When schools are in as much trouble as the ones in Kansas are, their students will have trouble competing in a global economy. this is not the environment that draws companies to relocate or expand in Kansas.

Wages

Figure 3

Source: Department of Labor, Quarterly Census of Employment and Wages June, 2017

The Wage graph shows many of the same trends one sees in Figure 1. California and Kansas are widely separated. Minnesota is outpacing Wisconsin again.  One of the interesting takeaways from this graph are how closely the states and the U.S. average were in 2014 and how dramatically they have separated as their divergent tax policies take affect. Over the last two years, the gap has widened considerably with the states that invested in their schools taking a big lead.

Both California and Minnesota went out of their ways to tax rich people at high rates, yet their average wage increases are outstripping Wisconsin and especially Kansas. Clearly, companies that pay high wages have not flocked to Kansas and Wisconsin. Even though someone making over $1.5 million annually could save over $10,000 by moving to Kansas, this isn’t enough enticement to get them to actually do it.

Gross Domestic Product (GDP)

Figure 4

Source: Bureau of Economic Analysis., GDP Regional/State June, 2017

GDP is a big picture look at an economy. If our Congress and president had any common sense at all, they would be copying California’s progressive tax and spending policies instead of Kansas’s.

Frugal Ron has reached the breaking point of hearing Republicans complain about President Obama’s economic policies and results while in the same breath lauding Wisconsin Governor Scott Walker policies. Pay attention to results people! If Walker’s policies worked, shouldn’t Wisconsin’s redline in the above three graphs be far above the U.S.’s black line?

Logic and Republicans

Kansas and Wisconsin made tax cuts benefiting businesses and high income individuals. Clearly they did not work. The degree of failure was proportional to the level of tax cuts each state made. Governors in both  states made unrealistic promises that raised expectations and actually magnified their failures.

Without a doubt, there is no logical reason to pursue tax cuts nationally with any expectation that they will better the lives of anyone but the rich. Adding in the recent experience of President Bill Clinton raising taxes on the wealthy, balancing the federal budget and bringing on the greatest and longest economic growth in our history with President George W. Bush and his tax cuts and resulting deficit bringing about the worst economic downturn since the Great Depression and all we can do is shake our heads in disbelief at Republican attempts to repeat their disasters.

Yet,  this madness of ignoring data and logic are Republican trademarks. From ignoring the impact of fossil fuels on climate change to ignoring data on increasing birth control access’ impact on lowering abortion numbers, Republicans rejoice in their blissful ignorance.  In their protective group think cocoon, anyone explaining the science of carbon dating is part of the attack on Christianity. Republicans may not be stupid but that doesn’t stop them from acting that way.

 

 


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